Raise in FDI cap will help insurance firms to get much needed capital from overseas partners. (Reuters)

The government on Thursday approved a plan to increase foreign direct investment in the insurance sector to 49 per cent.

The decision was taken at a meeting of the Cabinet Committee on Economic Affairs. Sources said the government was hopeful the Bill would be passed in the current session of Parliament.

“There is still a lot of time in the ongoing Parliament session. The Insurance Laws (Amendment) Bill will be taken up soon,” a source close to the development said.

If the government’s move goes through, it will end an over eight-year logjam in the sector where, despite repeated efforts, FDI has remained capped at 26 per cent.

According to the proposal approved by the CCEA, the insurance sector would have a composite FDI cap of 49 per cent. While FDI up to 26 per cent would be under the automatic route, companies would have to take approval from the Foreign Investment Promotion Board for more foreign investment.

Significantly, voting rights of the foreign partner has not been capped, although insurance firms will be under the management and control of the Indian partner. This would mean that the Indian partner would have the right to appoint a majority of directors, and be able to control management and policy decisions.

“The issue on voting rights will have to go to Parliament. But we prefer a 49% cap without any riders,” Finance Minister Arun Jaitley had said.

Officials indicated that the change in stance came just before the Union Budget. “It was decided that not too many restrictions such as a cap on voting rights would be imposed on the foreign partner, but the interests of the Indian partner would also be protected,” said a senior official.

Jaitley had announced the government’s intent to liberalise the sector in the Budget, and the move is seen as a signal of the government’s intent to encourage business and investments.

Insurers will now be able to raise much needed capital from foreign partners and expand the business. According to estimates, the raising of the cap could bring in as much as $ 6 billion in funds to the country.

“It is heartening to see that the central government is acting quickly on policy decisions. Once approved by Parliament, this move should bring in much required long-term capital for the sector. It will also bring in domain capital which is of critical importance in this phase of growth of the life insurance industry,” Rajesh Sud, CEO and Managing Director, Max Life Insurance, said.

However, some insurers remained cautious. “We will wait until it is approved by Parliament. The Bill was taken up by the previous government too but could not be enacted,” said an executive with a private insurance firm.

The proposal to raise the FDI cap has been pending since 2008, when the UPA government introduced the Insurance Laws (Amendment) Bill to raise foreign holding in insurance joint ventures to 49 per cent from the existing 26 per cent.

The Bill could not be taken up in Rajya Sabha because of opposition from several political parties, including the BJP.

The insurance sector was opened up for private players in 2000 after the enactment of the Insurance Regulatory and Development Authority (IRDA) Act, 1999.